Bank market power and supervisory enforcement actions

This paper investigates the relationship between supervisory enforcement actions and bank market power. Employing a unique dataset on enforcement actions in Italy from 2006 to 2018, we first document that banks with higher market power are more likely to escape public scrutiny. Further, this effect is more substantial for local banks than commercial ones, coherent with the view that national supervisors are softer when dealing with local banks. Second, when uncovering the main characteristics of the banks with higher market power, we find that banks with higher market power do not outperform other banks in profitability but show a worse loan quality, suggesting that banks with higher market power have riskier loan portfolios than other banks and attract fewer enforcement actions. Our results are robust across several econometric techniques and alternative specifications by contributing to the long-lasting debate on the implications of the bank market power on financial stability, considering the role of enforcement actions.